TD₿: Bitcoin Transaction Fees: The Future Economics of Bitcoin Settlement by Joe Burnett and Pierre Rochard
TL;DR Bitcoin's dynamic fee market makes it resilient against potential attacks and incentivizes more scaling technologies to be developed and implemented.
Hey Bitcoiners,
A common critique you will often hear is that Bitcoin’s long-term security is compromised because transaction fees are too low and in the future, the reward from fees alone won’t be large enough to keep miners from shutting off their machines as the block subsidy is reduced with each halving event.
The first reason this particular FUD annoys me is it’s purely hypothetical. It assumes there will be some problem decades from now when there is little evidence of one today.
Bitcoin fees spiked at the top of the 2017 bull run after the network became congested, but have since dropped substantially as shown in the chart below.
Despite this, Bitcoin’s security has remained impeccable and it continues to settle trillions of dollars with finality and without any middlemen.
This drop in transaction fees is driven by many factors such as transaction volume and technological improvements like Segregated Witness, transaction batching, and the Lightning Network. In my view, the chart above broadly displays how Bitcoin has become more efficient as a decentralized payment network over time. Unlike in 2017 when transaction fees increased significantly with more trading volume, Bitcoin handled the increased adoption much more efficiently in 2020 and beyond. This is bullish!
The second reason why this FUD irks me is there’s an underlying bearishness to it. People are still too bearish on Bitcoin and it shows. I don’t blame them for it…it’s difficult to wrap your head around just how much of the world’s economic activity will be settled on this protocol. People view the “small” fees today through the lens of Bitcoin’s current dollar exchange rate and adoption level. They cannot fathom how much things can change and how much value will be packed into 1 sat in the future.
A third reason is one that was brought to my attention this morning when I read this great report hot off the press from Joe Burnett and Pierre Rochard on Bitcoin transaction fees. (09/20/22).
The report states that the fee market is dynamic and will respond to censorship attacks if need be. If censorship occurs in the form of an “Empty Block Attack”, then fees will spike as the mempool fills with transactions and users start competing with one another to get in the next block, making it more expensive for the attacker to continue censoring.
With this in mind, one can view the current low transaction fees on Bitcoin as a sign that there is little to no censorship of transactions taking place. This is bullish!
All in all, people who push FUD around Bitcoin’s transaction fees and its long-term security misunderstand the role of miners in the network, how the fee market works, and lack the imagination of how much economic activity will be transacting on the Bitcoin protocol in the future.
Tick tock next block,
Cory Klippsten
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Quote of the Day
“BTC has no un-censorship incentive (“security”) right now because it is not being censored. Transaction fees go up in response to censorship, not preemptively. Bitcoin is anti-fragile.” - BitcoinIsSaving, Bitcoiner
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Meme of the Day
(h/t @plan_marcus)
Tick tock freaks 😎